Cannibalization occurs when a new proposition reduces the value of a firm’s existing assets and organizational routines (Velu and Stiles 444). A firm’s willingness to cannibalize depends on the extent to which it can lessen the actual or potential value of its investments in assets.
A company can balance cannibalization by reducing the prices of old products. Another method is to balance two key dimensions – procedural rationality and politics. For example, Samsung changes the prices of its old phones whenever a new phone model is out. For procedural rationality, the decision-making process must serve the firm’s interests. To balance politics, the interests of those involved in making decisions must never come before those of the organization.
There are several positives to cannibalization. It can promote innovation and thus the firm’s long-term success. If a firm is unwilling to pursue new directions for fear of adverse effects, it loses its range of exploration that could promote sustainability (Velu and Stiles 445). There are several negatives. For instance, shifting from one business model to another can be disruptive. Additionally, it can reduce the value of a profitable existing business while exploring an uncertain profit stream or even an unprofitable business model. For instance, when a firm brings a new product model to the market, it may fail to incorporate the old model in its marketing strategy, causing a substantial loss of revenue.
Understanding where the product is in the lifecycle can provide insight on where to focus for higher sales. If the product is in the introduction stage, the focus should be to create product awareness and trial. If the product is in the growth stage, the focus should be to maximize market share. At the maturity stage, the focus should be to maximize profit while defending market share. When the product gets to the decline stage, the focus should be to reduce spending and harvest the product’s last bit of profitability. Apple’s behavior with the iPhone is a perfect example of how a firm’s understanding of the product stage could impact sales. Apple knows that iPhone sales are in decline, so they announced in 2018 that they would cease reporting unit sales. At the same time, they continue to report unit profits by charging high prices for their phones.
Velu, C., and P. Stiles. “Managing decision-making and cannibalization for parallel business models.” Long Range Planning, vol. 46, no. 6, 2013, pp. 443-458, doi:10.1016/j.lrp.2013.08.003.